ACA Subsidies and Your Income: How Pre-Tax Contributions Can Lower Your Premium
US marketplace premium tax credits are based on projected household modified adjusted gross income (MAGI) for the coverage year, measured against the federal poverty level. Changing MAGI can change the subsidy.
What counts
MAGI for this purpose starts with adjusted gross income and adds back untaxed Social Security, tax-exempt interest and excluded foreign income.
What lowers it
- Traditional 401(k) or 403(b) contributions through payroll.
- Traditional IRA contributions, if deductible.
- SEP-IRA or solo 401(k) contributions for the self-employed.
- HSA contributions.
- The self-employed health insurance deduction.
Roth contributions do not lower MAGI.
Why it matters
The expected contribution toward a benchmark plan rises as a share of income, and depending on the rules in force for your coverage year there can be a cutoff around 400% of the federal poverty level where the credit stops. Near a threshold, a few thousand dollars of pre-tax saving can mean a noticeably larger credit.
Example
A couple projects $84,000 of MAGI. Putting an extra $7,000 into traditional retirement accounts brings it to $77,000. The money is still theirs (in a retirement account), their income tax falls, and the subsidy rises. The exact change depends on age, location and the year’s rules; the estimator on HealthCare.gov shows it before enrolling.
Keep it honest
Report income changes during the year. If actual income ends up higher than projected, some of the advance credit is paid back at tax time.
Free tools
- Roth vs traditional calculator: https://smartbudgetsheets.surge.sh/calculators/roth-vs-traditional-calculator/?utm_source=nostr
- Retirement savings calculator: https://smartbudgetsheets.surge.sh/calculators/retirement-savings-calculator/?utm_source=nostr
- 401(k) match calculator: https://smartbudgetsheets.surge.sh/calculators/401k-match-calculator/?utm_source=nostr
- Debt Payoff Planner, up to 8 debts (Payhip): https://payhip.com/b/PtBLU?utm_source=nostr
- 42 free budget templates, pay what you want ($0 is fine): https://smartbudgetsheet.gumroad.com/l/ngpkrb?utm_source=nostr
General information, not financial advice. Figures are rounded examples.
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